Corporate Bond Market Transaction Costs and Transparency

ABSTRACT

Using a complete record of U.S. over‐the‐counter (OTC) secondary trades in corporate bonds, we estimate average transaction
costs as a function of trade size for each bond that traded more than nine times between January 2003 and January 2005. We
find that transaction costs decrease significantly with trade size. Highly rated bonds, recently issued bonds, and bonds close
to maturity have lower transaction costs than do other bonds. Costs are lower for bonds with transparent trade prices, and
they drop when the TRACE system starts to publicly disseminate their prices. The results suggest that public traders benefit
significantly from price transparency.